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Slow CPI points towards rate cuts

Daniel Morrissey

The annual pace of inflation has slowed sharply and is below the Reserve Bank of Australia's target band of 2-3 per cent, opening the way for the central bank to cut interest rates next week.

The consumer price index rose just 0.1 per cent in the March quarter, compared with the previous quarter, taking the annual speed of inflation to 1.6 per cent, the Australian Bureau of Statistics said.

The yearly headline inflation rate nearly halved from the 3.1 percent recorded in the December quarter.

At the underlying level the trimmed mean reading of inflation climbed 0.3 per cent for the quarter and 2.2 per cent for the year. Economists had tipped 0.6 per cent and 2.4 per cent, respectively.

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The sharp slowing in inflation is likely to fuel speculation the RBA could follow up a likely May rate cut with another reduction as early as June.

RBA governor Glenn Stevens said earlier this month the central bank's board would review the inflation outlook "before considering a further step to ease monetary policy" on Tuesday.

The RBA has kept official rates steady, at 4.25 per cent, so far this year after cutting rates by a total of 0.50 of a percentage point in November and December last year.

Business leaders and trade unions have called on the RBA to cut rates to help ease pressures in struggling sectors of the economy, such as retail, manufacturing and tourism.

Before the inflation data, financial markets had priced a 95 per cent chance the RBA would reduce rates by 0.25 of a percentage point on Tuesday and another three quarter-point cuts over the year.